Government sends mixed messages on SME financial transparency

The Government’s intention to reduce still further SMEs' statutory filing requirements in order to reduce red tape is likely to prove to be counter productive by making it harder for small businesses to secure growth funding.

Business Secretary Vince Cable announced recently that the audit threshold for filing accounts at Companies House would rise from the current £5.6 million turnover per annum to £25 million, while exempting micro businesses with up to £1 million turnover from filing their accounts at all. It is estimated by the Government that the change will save SMEs up to £400 million pounds per year.

Martin Williams, Head of External Affairs at Graydon UK, commented; “As the Department for Business, Innovation and Skills seeks to reduce statutory filing requirements, HMRC has announced that it intends to target 50,000 small businesses this year in order to examine the quality of their book keeping. Those found deficient could incur financial penalties of up to £3,000. In effect, HMRC is saying keep good records, while the government appears to be recommending the opposite in the interest of fulfilling its promise to reduce red tape.

“The Government’s intention to relieve SMEs of administrative burdens is to be applauded but in a continuing uncertain funding environment the reality is that even less financial transparency will hold SMEs back, particularly if the economic recovery weakens further.”

According to Martin Williams, during the credit crisis as economic conditions changed rapidly, banks, credit insurers and trade suppliers sought greater financial transparency from SMEs before granting them credit. In many cases, where annual accounts filed at Companies House were suspected of being out of date, lenders began to ask in increasing numbers for up to date monthly management accounts to gain a better understanding of companies financial standing before granting them credit.

Philip King, Chief Executive of the Institute of Credit Management has commented: “As well as bank lending, businesses also extend credit to one another based on the trust that comes from knowing that the company they are lending to is financially viable, and one of the essential proof points is a set of audited accounts. Far from helping small businesses, the move is more likely to damage a company’s access to credit, restricting growth and in fact adding to their costs.”

Martin Williams has added; “Small businesses need to keep a proper ongoing check of their financial situation and should not be tempted to cut financial management corners in what is an essential part of running a business.”

What now for company insolvencies?

Administrations rose 1.4% to 642 in Q4 2010 (Q3 2010: 633). The latest figures reflect a 24.4% decrease on the same quarter a year earlier (Q4 2009: 849).

"This rise reflects the increasing pressure that many UK firms are facing. However, these figures are still way off their peak in Q1 2009, when 1,311 companies fell into administration," commented Malcolm Shierson, Partner at Grant Thornton's Recovery and Reorganisation practice.

Meanwhile, the number of companies entering liquidation saw a slight fall of 0.2% to 3,955 (Q3 2010: 3,964). The latest figures reflect a 11.3% decrease on the same quarter a year earlier (Q4 2009: 4,457).

"Whilst these figures could be said to indicate rising fortunes for the UK economy, dark clouds are looming on the horizon," continues Shierson.

"Increases in both direct and indirect taxes are starting to bite. The Government's austerity measures will increasingly impact on the private sector economy as the cuts accelerate. We are working with an increased number of distressed retailers, particularly those reliant on consumers making large discretionary purchases."

"Moreover, it is the growing probability of sustained rises in interest rates that poses the biggest threat to companies with obligations to service large debts."

R3 president, Steven Law, comments on the latest insolvency statistics:

Corporate insolvency statatistics

“The fact that corporate insolvencies in 2010 were lower than in 2009 suggests that this has been an atypical recession. HMRC’s Time to Pay scheme and the historically low interest rates have been effective at stemming the flow of insolvencies that usually occur post-recession. However it is important that businesses continue to carefully monitor their financial health as many will be affected by the implementation of recent fiscal policies.

“Businesses that rely on consumer spend will see their bottom line affected by the VAT increase as they try to absorb the tax or pass it on to their consumers which will have a negative effect on consumer-demand.

“Our research found that ten per cent of businesses describe themselves as reliant on public sector contracts and these businesses will be hit as the public sector cuts start to take effect this year. Our members believe that the construction industry will be the worst affected by the public sector cuts due to the reduction in capital spending in education and social housing.

Late payments by companies – an early indicator of weakening trading – have increased to the highest level in three years, Experian has warned.

Payments in the final quarter of 2010 bucked the slowly improving trend for the year by rocketing 16pc to an average of 25.7 days late, the information services company said.

Payments are "timely" indicators of company health and banks will scrutinise the data to inform lending decisions. They may respond by tightening credit conditions for small companies further.

In 2010 the annual rate of business insolvencies fell for the first time in two years

In 2010 the annual rate of business insolvencies fell for the first time in two years as the financial health of UK businesses improved, according to the latest Insolvency Index from Experian®, the global information services company.

1.04 per cent of UK businesses failed in 2010, compared to 1.25 per cent in 2009, the first annual drop for two years. The total number of insolvencies decreased from 24,209 in 2009 to 19,946 in 2010 - an 18 per cent drop.

March 2010 saw the greatest number of insolvencies for the year when 0.11 per cent of the total business population failed. From March onwards, the failure rate saw a general improvement, hitting an annual low of 0.07 per cent in August and again in November.

The UK's business community finished 2010 stronger than it started the year. The average financial strength score[2] of UK businesses fell from 81.16 in January to reach its lowest point of 80.70 in May, but since recovered to reach a full year high of 81.35 in December.

Max Firth, MD of Experian PH, said: "2010 has been a period of relative stability for business insolvencies and the improving trend in the insolvency rate has been positive. This contrasts significantly to the last major recession of the early 1990s when the rate escalated over a long period and peaked even as the country came out of recession.

But what now for insolvencies?  Was this just a 'blip'!

Number of builders going bust falls by 23% since recession peak

The number of insolvencies in the construction industry has fallen by 13% over the last year to 1,470 in the last three months (Q3 2010) down from 1,685 a year ago (Q3 2009),says Wilkins Kennedy, the Top 22 accountancy firm.

Insolvencies in the construction industry have fallen by 23% from their peak of 1,913 during the recession in Q1 2009.

According to Wilkins Kennedy, economic growth has finally halted the rot in the construction sector. However, Wilkins Kennedy says that in part, construction sector insolvencies are down because so many of the weaker construction companies have already been driven to the wall over the last three years.

Wilkins Kennedy also points out that companies that still have outstanding bank loans that are coming up for renewal may struggle to roll those debts over with their banks.

Says Anthony Cork: “Banks are still recovering from the damage they suffered during the recession. They had their fingers badly burnt and are still reluctant to lend to the construction industry. Those banks are going to demand higher interest margins, higher arrangement fees and tougher covenants. It is going to hurt.”

Almost 148,000 UK companies are facing ‘significant’ or ‘critical’ financial problems

In todays Red Flag report from Begbies Traynor almost 148,000 UK companies are facing ‘significant’ or ‘critical’ financial problems whilst those with ‘critical’ problems alone are struggling with nearly £53 billion worth of liabilities.

The report, which monitors the early warning signs of company distress, shows a 4% increase to 147,836 companies which experienced ‘significant’ or ‘critical’ financial distress in Q4 2010, compared to 141,527 companies in Q4 2009, representing the first year on year increase for seven quarters.  The 147,836 companies also represented a 20% increase from 123,361 in Q3 2010, which was considerably more pronounced than the usual seasonal increase as seen this time last year (the number of companies increased by 6% from Q3 2009 to Q4 2009).

Whilst these figures are heavily weighted to the less severe category of companies facing ‘significant’ problems (representing 144,818 companies in Q4 2010), the data shows a marked increase in actions taken by trade creditors against their debtors.

The 3,018 companies experiencing ‘critical’ financial problems alone owe a total of £52.7 billion to creditors, suppliers and service providers, which compares to £57.5 billion owed by 2,943 companies in Q3 2010.  The decrease in the average size of liabilities, from Q3 to Q4, indicates that a higher proportion of SMEs are suffering increases in financial distress.

Dark clouds indeed are gathering.

HMRC Business Payment Support scheme and keeping proper records

In 2008, HMRC launched its Business Payment Support scheme, which has recently been extended for the duration of the present Parliament. Popularly known as ‘Time to Pay’, the scheme allows struggling businesses to defer tax payments.

However, recently business owners have expressed concerns that HMRC is taking a harder line despite the fact that they are willing – but unable – to pay.

Geoffrey Rogers, of Geoffrey Rogers Chartered Accountants and Tax Consultants in Plymouth, believes small firms – charged with creating jobs and driving economic growth - want to comply with their tax requirements but are not being given enough support to do so.

He said: “With banks still not lending, late payment on the up and other factors hitting cash flow, many small businesses are still facing an incredibly tough financial climate and signs that HMRC is set to pull the rug from under them are worrying.

“It’s typical that HMRC is going to fine small businesses for not keeping ‘proper records’ when it does not offer any real definition of what this means. Without clarification, and certainly without better education, in many cases, fining small businesses for poor record keeping would be like punishing a child with learning difficulties for poor reading. “Once again we are looking at the big stick being favoured instead of the carrot, which is, I’m afraid, typical of HMRC’s current approach.

2011 will see continued record levels of personal insolvency

Personal insolvency specialists, RSM Tenon predict that annual personal insolvencies over 2010 are likely to exceed the record level set last year of 134,132.

With the upcoming increases in VAT and the inevitable rise in interest rates combined with the public sector cuts, RSM Tenon is predicting continuing record levels of personal insolvencies throughout 2011. Mark Sands, Head of Bankruptcy & Personal Insolvency at RSM Tenon, said: “As we come to the end of 2010 we are recognising that there have been record levels of personal insolvency again this year. Around 135,000 people have used personal insolvency as a last hope for dealing with their financial troubles, which is still approximately 25% higher than pre-credit crunch levels. We expect that this figure will increase to around 140,000 over 2011 with the rate set to continue until the 2012 Olympics.